How Does Cryptocurrency Mining Works?

Without any doubts, each of you has heard the terms like mining and cryptocurrency, and many have a general image of what it is and how it works but not everyone is certain in their knowledge.

Is it a form of electronic money? Yes, in some way it is but cryptocurrency can’t be compared to other “virtual” money that we store on our credit cards, PayPal accounts or other online wallets. Is it a currency? It is but the main distinctive feature of it is that it is not controlled or regulated in any way by the countries’ central banking system and its rate is not tied to the economy of any country directly.

In fact, a cryptocurrency is a special form of payment and the financial asset that, as some believe, was created to revolutionize the financial sphere, while others believe that it is nothing more than another “bubble”.

Which statement is true? There are many controversial opinions on this matter and in this post, we are going to give you a clear definition of cryptocurrency and explain how does the mining work in order to help you clarify everything.

What Is Cryptocurrency?

Cryptocurrency is a popular type of digital money, which is based on the technology of cryptography (read as data encryption), has no physical appearance, and exists only in electronic form. Its main advantages are anonymity, decentralization and security.

The circulation of cryptocurrency inside the system is running directly (P2P), without the participation of a third party. Each participant is absolutely equal. This means that it does not give any privileges to anyone, regardless of their social and financial status, and at the heart of such virtual money lies the decentralized open database called the blockchain.

What else should you be aware of? The majority of existing cryptocurrencies have a specific limit of emission, which means that the release of new coins is predetermined in advance, for example, for bitcoin it is 21 million coins. However, NVC and PPC currencies have no emission limits.

WhatIsABlockchain?

The blockchain is probably one of the most significant technological innovations of Bitcoin, which is not regulated by any central body; instead, its users independently implement and verify transactions. This eliminates the need for third-party involvement in the processing and storage of payment data. The completed transaction is recorded in the public book, where it is checked and relayed by other users. On average, it takes about 10 minutes to create each new block.

Based on Bitcoin’s protocol, such a database is distributed to numerous nodes that make up the system and, when connected to a network, each computer receives a copy of the chain that contains all the entries, and which is a proof of all transactions that have ever taken place.

This allows you to access information about how many coins were stored at a specific address at any time in the past.

What Is A Transaction?

Just like with the usual currency, a transaction is a simple transfer of money from one digital account to another.

Besides, a transaction is a term used to name a certain record that contains information about the money transfer including the details like from which wallet the money was transferred, the date and time of transfer, etc. What else should you know? This record (its hash) is signed by the sender’s private key and sent to everyone in the county, pending confirmation.

What Is Mining And How It Works?

Mining is a term that defines the process of generating a cryptocurrency based on the mathematical problems’ solutions generated by a computer.

The process of mining the cryptocurrency includes two simple steps:

The very first thing required before a person can start generating digital currency is a special program to obtain coins. How do these programs work? For large currencies, you can find several programs that work with a common production pool, and for smaller ones, there is usually only one client, which also serves as a wallet for this cryptocurrency. Thus, before you start, you just need to download such a program and install it, after which you can proceed to the next step.

What is the next step? After the first installation, the program connects to the network and synchronizes with it. This can take from a few minutes to several hours, depending on how many blocks you need to solve before you can synchronize. When the synchronization is complete, you can start mining.

How to mine? To do this, just go to the part of your wallet that is intended for mining, enter the desired values and click the “Start” button. After that, the system will begin to generate coins, and, depending on the equipment used, the result will appear within a few minutes, hours or days. Therefore, it is important to choose the right equipment.

What else to be aware of? When developing any type of currency, you have to set a specific algorithm, which differs from one type of coin to another. There are two types of algorithms that are used in almost all currencies that exist today, they are Scrypt and SHA-256. Their operation differs. Mining for both algorithms is quite complicated and its difficulty increases with the increase in the total number of coins mined, which means that this process is quite time-consuming and can’t be called simple.